Saturday, 24 January 2009

China Factor Tipped to Worsen Stock Fall

Experts say slowdown to be felt worldwide

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Guanyu said...

China Factor Tipped to Worsen Stock Fall

Experts say slowdown to be felt worldwide

Bloomberg in London
24 January 2009

Stocks will retreat around the world because of shrinking demand from China as growth in the world’s third-biggest economy slows, said Nouriel Roubini, the New York University professor who predicted last year’s financial crisis.

Global equities would fall 20 per cent this year from current levels as China, which contributed 19.5 per cent to total growth in 2007, contended with its slowest expansion in seven years, Mr. Roubini said.

Wall Street strategists predict the Standard & Poor’s 500 Index, down 8.39 per cent so far, will rise 17 per cent this year.

Mr. Roubini, who teaches economics, said the mainland was already in a “recession” despite government data showing a 6.8 per cent fourth-quarter growth rate, as power output declined and manufacturing shrank.

“Demand is falling in China, they’re overinvested in capacity and there’s a global supply glut,” he said. “It has very, very important implications.”

Mr. Roubini’s view is shared by Societe Generale global strategist Albert Edwards, who was correct in forecasting in March last year that a United States contraction would spur a bear market in equities.

Mr. Edwards said the mainland slowdown would reduce earnings at industrial, energy and raw-materials companies, sparking a sell-off in emerging and developed-market stocks that might send the S&P 500 down 40 per cent to 500 points.

“People should be thinking really hard about this rather than sticking their heads in the sand,” said the London-based strategist and member of the global investment strategy team in Thomson Extel’s surveys in the past three years. “We’re just pointing out when the emperor doesn’t have any clothes on.”

The consensus among 11 strategists surveyed is for the S&P 500 to end the year at 1,056 points. The index fell 1.52 per cent Thursday to 827.5 points.

The mainland economy grew 9per cent last year after a 13 per cent expansion in 2007, the fastest in the world. The Shanghai Composite Index fell 0.71 per cent yesterday.

Mainland shares traded in the US fell to their lowest level in two months on Thursday. The Bank of New York Mellon China ADR Index, which tracks American depositary receipts, fell 4.8 per cent to 236.43 points, the lowest since November 20.

Economists at JP Morgan Chase, Citigroup, the World Bank and the International Monetary Fund all predicted the mainland would grow at least 7 per cent this year, while investors Jim Rogers and Mark Mobius are buying mainland shares on expectations Beijing will bolster economic growth with interest-rate cuts and fiscal stimulus. The IMF said China’s contribution to global growth increased to 19.5 per cent in 2007 from 17.2 per cent in the previous year.

Beijing, which has US$1.9 trillion set aside in the world’s largest reserves, plans to spend 4 trillion yuan (HK$4.54 trillion) on bridges, housing and tax breaks to boost the economy. President Hu Jintao has pledged further measures to maintain stable growth in the face of “serious challenges and difficulties”.

Mr. Rogers, who predicted the start of the commodities rally in 1999, recommended investors buy mainland agriculture, water treatment, power generation and infrastructure stocks because the companies would not be hurt by the slowing of the country’s economy.

“China could be in recession, I have no idea and it’s not relevant to me, because I’m using my judgment as to what will happen six months from now,” said Mr. Rogers, who has authored books including A Bull in China: Investing Profitably in the World’s Greatest Market. “There is a lot happening in China, and there will be those that will hold up well.”

The mainland economy will grow 6.3 per cent this quarter from a year earlier, according to the median estimate of nine economists surveyed after Thursday’s GDP report.

Mainland electricity output declined 7.8 per cent in November from a year earlier after falling 3 per cent in October, the first declines since February 2002, according to China Economic Information Net data. Manufacturing shrank for a third month as the deepening global recession cut demand for the country’s toys, clothes and electronics.

Mr. Edwards said rising unemployment among factory workers would fuel social unrest, threatening the Communist Party’s survival and increasing the risk authorities would devalue the yuan to boost exports.

The yuan appreciated about 19 per cent against the US dollar between 2005 and July last year as Beijing redressed what US officials saw as an unfair price advantage for exports. The yuan has since stabilised at about 6.85 per dollar.

Timothy Geithner, US President Barack Obama’s nominee for Treasury secretary, said yesterday the new US administration believed Beijing was “manipulating” its currency.

“If you amble your way through the analysis you realise, if push comes to shove, they will devalue,” Mr. Edwards said.

That might spur lawmakers in the US and China to increase trade barriers, he said.